EU Hammers Out Deal on Bank Regulation

European finance ministers have agreed a deal on rules for supervising eurozone banks, hours ahead of an EU summit. Around 200 of the biggest eurozone banks will come under the direct oversight of the European Central Bank (ECB), which will act as their main supervisor and supplant national regulators.

France and Germany agreed to a compromise on the proposed scope of the plan, under which the ECB will assume direct responsibility only for eurozone banks with more than €30bn in assets, or whose assets exceed 20% of their home country’s gross domestic product (GDP). Banks below that threshold level will remain the primary responsibility of national regulators, although the ECB will be able to intervene if certain conditions are met.

The “historic” agreement, which moves Europe closer towards a ‘single banking union’, came after lengthy talks and shortly before the start of a summit of EU leaders. The deal was announced by the meeting’s chair, Cypriot finance minister Vassos Shiarly.

He said that the “overall aim is to restore confidence in the banking sector”, comparing the deal to a “Christmas present for the whole of Europe.”

The new supervision plan is expected to be submitted to national parliaments for their approval early in 2013, and represents the first phase of an overall EU banking union, which is expected ultimately to include a joint bank resolution fund and a common fund for guaranteeing bank deposits, which has already impacted on sovereign ratings.

Once the new ECB-run supervisor begins operating, banks will be able to receive funds for recapitalisation direct from the European Stability Mechanism (ESM), instead of from their home governments.

Some concessions were won by the UK, Sweden and other non-eurozone countries outside the banking union, which secured safeguards to check the power of the ECB and maintain some national influence over technical standards applying to all EU banks.

“After months of halting progress, the EU’s financial journey has reached a fork in the road,” commented Darren Sharma, chief executive officer (CEO) of Frontline Analysts. “By taking their first steps towards a banking union, the eurozone ‘ins’ are moving away from the ‘outs’.

“Greater oversight of the bloc’s banks is just the start. Running through these measures is the conviction that the solution to the eurozone’s ills is more Europe, not less. Ultimately the changes will see the ECB come of age as a central bank – able not just to set interest rates but also issue its own bonds.

“In an era of increasingly assertive central banks, an ECB with the same powers as the US Fed may force Eurozone members to explicitly share fiscal liability.

“Many Germans still have an acute fear that they will end up picking up the tab, but the eurozone’s leaders have agreed that the bloc must reform or die. Born amid the ashes of the financial crisis, the banking union they have proposed is both a solution to a problem and a lurch towards greater financial union.”

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